HONG KONG, Aug 27: Hong Kong could cut direct tax next year if the economy remains robust but also plans to move ahead with consultations on a goods and services tax to expand its revenue base, the financial secretary said on Saturday.
The territory on Friday announced surprisingly strong economic growth of 3 per cent in the second quarter over the first quarter, and that has put more pressure on the government to cut taxes, Henry Tang told Reuters in an inter-view.
He is considering making income and/or corporate tax cuts in his budget in March but said a public consultation on a goods and services tax (GST) is still high on the government’s agenda.
“Given our very narrow tax base I don’t wish to narrow it even further,” Tang said. “Government expenditure is very stable but its income is not very stable and that is not a formula for a very stable government fiscal account.”
A public consultation on a GST has been delayed by a change in government after Tung Chee-hwa resigned as Chief Executive earlier this year and was replaced by Donald Tsang.
“I would like to see the discussion on a GST begin as soon as possible,” Tang said. “I envisage it will have to be a fairly long consultation of up to a year because ... it will be very controversial and very contentious.”
A GST typically takes three years to implement and would provide a broad income stream, Tang said. The government has run huge fiscal deficits in recent years as more than 40 percent of workers pay no income tax, which is low at around 16 percent.
The government aims to balance its books by 2008/09 but Tang said it could still run a deficit if revenue does not expand.
Tax cuts will depend on economic performance but Tang said he was fairly optimistic about the economy even though growth will slow in the second half as oil prices and rising interest rates could affect the territory’s trading partners.
The economy grew 6.5 per cent in the first half from a year earlier, and growth would be close to 5.5 per cent for the full year, Tang said. His fiscal forecasts assume four per cent average real growth a year over the next four years.
“I have every reason to believe 4 percent a year is a realistic forecast for the next four years based on our trading partners’ performance, our domestic economic activity and our past cyclical trends,” he said.
One of Asia’s best performing economies this year, the territory is benefiting from China’s economic expansion.
A recent slowdown in the property market - a market that serves as a gauge of consumer confidence - was good, Tang said.
“Last year the property market roared ahead quite robustly. I believe taking a breather is a healthy development,” he said.
Rising interest rates have dampened property sales but should also keep a lid on inflation.
“I don’t want to see too much inflation,” he said. “I would say inflation of 2-3 per cent would be a healthy band.”
The government forecasts inflation of 1.5 percent in 2005 over 2004. Economists see it rising and investment bank Merrill Lynch expects it to top 6 percent by the end of 2007.
“That would be very high. It would be worrying for us,” Tang said.
Hong Kong is required to follow US monetary policy because of its currency peg to the US dollar.
In May it strengthened that peg by widening the Hong Kong dollar’s trading range against the U.S. dollar and setting an upper limit for the first time.
However, some analysts expect that when China’s currency eventually becomes fully convertible it may make sense for Hong Kong to link its currency to the yuan.
“I don’t think it will become fully convertible soon,” Tang said. “It’s too soon to prepare for it. We still have room to observe and see how they manage their currency and open up their capital account.”
Hong Kong hopes to allow retail investors and companies that do business in China to start trading yuan non-deliverable forward contracts by the end of this year, Tang said.
“It will be an important market,” Tang said. “Small companies especially currently have no way to hedge their risk.” At present the NDF market in Hong Kong is limited to institutional investors.—Reuters
